Final passage of Tax Reform expected week of December 18

Congressional negotiators have announced they have clinched a deal to reconcile the House and Senate versions of tax reform. Final legislative text may be released late on Friday, December 15, or over the weekend. Lawmakers plan to have a final vote in the Senate and House early in the week of December 18.

ICSC has been actively engaged throughout the legislative process to ensure that the final bill accomplishes the stated intent of spurring investment and economic growth. Both bills passed by the House and Senate preserve interest deductibility and like-kind exchanges for commercial real estate. The period of time required for a carried interest to receive the lower long-term capital gains rates would be increased from one to three years. While the three-year holding period is not ideal, it is a workable compromise, especially given the intent of President Trump and others to restrict or rescind carried interest altogether.

ICSC, working in conjunction with other groups, successfully fought back a number of onerous provisions that appeared in earlier tax reform proposals. For instance, the Border Adjustable Tax (BAT) that was included in the House Tax Reform Blueprint was dropped earlier in the year amid significant concerns about the impact on merchants and consumers. The BAT would have significantly increased taxes on imported goods and consumer products. The Blueprint also proposed to end the deduction for business interest entirely. An earlier reform proposal introduced in 2014 by then-Ways and Means Committee Chairman Dave Camp (R-MI) was even less favorable for commercial real estate. It considerably lengthened depreciation lives for all assets, repealed like-kind exchanges, and drastically limited carried interest.

One of the areas that we continue to watch closely is the proposed change on taxes for pass-throughs. In some cases, there may be preference given to passive investors over the active investor in a partnership. There are likely to be additional changes to accommodate last-minute demands from Senators who are not happy with the final conference package, for instance, the Child Tax Credit was made more generous at the insistence of Sen. Rubio (R-FL).

Reports to date indicate that the final tax reform bill will lower the top rate on individuals to 37%. There will be a 20% deduction for pass-through businesses income as was included in the Senate bill. We understand that this deduction will include some calculation to provide relief to capital intensive business, the tax exemption for private activity bonds is expected to be retained, as are the New Markets and Historic Tax Credit. These provisions will likely be modified, however, to address potential abuses.

ICSC will continue to provide updates on the developments with tax reform and additional insight into how those provisions may impact the retail real estate industry.